When constructing a target-date fund [TDF] glide path, how the
fund manager addresses risk determines the success of the fund—and
investors’ retirements. Building wealth
fast early on is a favored approach,
but American Century Investments®
says it’s often forgotten—until right
before a fall—that like running a marathon, winning the retirement race
requires the correct pace and balance.
Alison Cooke Mintzer, editor-in-chief
of PLANADVISER, recently spoke with
Richard Weiss, chief investment officer,
multi-asset strategies, at the company
about its more measured, balanced
approach to managing risk and the
success of that long-term strategy.

PLANADVISER: What risks should
be considered in creating a glide
path? Are some more significant than
others?

RICH WEISS: There are a variety of
risks involved in target-date fund
risk management, chief among them
longevity risk—the risk of outliving
wealth. But constructing a superior glide path is not as simple as
minimizing longevity risk, because,
when you seek to do that, you exacerbate one or more of the other risks
inherent in lifecycle investing. Market
risk, inflation and interest rate risk,
sequence-of-returns risk, tail risk, and
abandonment risk all must be carefully considered, measured, and effectively balanced to design a successful
target-date glide path.

Take abandonment risk and the asso-ciated tail event risk: what are the risksof an extreme event occurring, drivingdown returns during a lifetime, and willthat trigger a decision to abandon thestrategy altogether? This is a notoriousrisk in retail investing because manyinvestors without professional coun-seling or a professional strategy willabandon an investment at precisely thewrong time, after a big downturn.There are also several risks thatcome into and out of play during a strat-egy’s life cycle. Inflation and interestrate risk typically become more impor-tant in retirement as one has morefixed-income investments.Sequence-of-returns risk is a moresubtle and insidious risk concerning thesteepness of the glide path. It’s basi-cally “luck of the draw” risk, or whereand when the bull and bear markets hitin a lifetime. A young investor encoun-tering a 2008 in a very far-dated target-date fund would feel less impact indollar terms and has the most timeto make up the loss. But for investorsabout to retire, who have built up themajority of their retirement wealth, asignificant bear market can be devas-tating. Consequently, the exact timingor “sequence” of returns in one’s life-time can be a major risk.

PA: How do target-date fund managers
think about and manage these risks?

WEISS: Fortunately, all the risks
discussed above can be measured and
managed. It’s how they are balanced,
or weighted, that differentiates target-date fund managers. Individual target-date fund managers often lean toward
weightings that are appropriate for only
certain employee plan demographics.

For instance, in emphasizinglongevity risk, many managers aim forthe highest expected return during theaccumulation phase of a target-datestrategy. But that brings many possibleoutcomes: some of the investmentstrategies may do very well, but otherswill do very poorly. Thus, there’s adispersion of possible return outcomesand, accordingly, a larger probability offailure in retirement.

We’ve taken a more balanced
approach than most of the competing
target-date structures in the industry.
Our position is highly differentiated
because of our dedication to minimizing
the subtle risks as well as the major
ones. This means, at times we may not
show the highest absolute return over a
short period, such as in the very recent
bull market. Competitors who emphasize longevity risk may have a higher
return in the near term, but they also
have much higher risk. How well we
balance multiple risks is evident in our
risk-adjusted returns over time—what’s
commonly known in the industry as
a Sharpe ratio. Why is risk-adjusted
return an important metric to measure
and compare? Because it directly
relates to wealth accumulation and, in
turn, successful retirement outcomes.

PA: How have you evolved your risk
management approach to incorporate
the market environment?

WEISS: Our goal is to fine-tune the
risk-balancing act by accounting for the

SPONSORED SECTIONBalancing Target-Date RisksFor Changing Market EnvironmentsLongevity risk must be balanced againstother risks when managing a target-dateportfolio for a diverse group of participants.Rich Weiss